Alternative Investments - Open and closed-end funds

A "closed-end fund" is also legally known as a "closed-end company". It is an investment company that sells a fixed number of shares at a one-time initial public offering. Shares are not continuously offered for sale; after the public offering, the shares typically can be bought and sold only on a formal exchange such as the New York Stock Exchange or the Nasdaq. Closed-end funds come in many varieties. The investment strategies, risk tolerance, return objectives and overall investment portfolios of closed-end funds vary across a broad spectrum. The investment portfolios are actively managed by investment advisers.

Once closed-end fund shares begin to trade, their prices are determined by supply and demand and not by net-asset value (NAV); therefore, the market price may be greater or less than the shares' NAV. Generally, a closed-end fund is not required to buy its shares back from investors upon request. However, some closed-end funds, commonly referred to as interval funds, offer to repurchase their shares at specified intervals.

One of the significant differences between closed-end funds and mutual funds is that closed-end funds are allowed to invest in a greater amount of "illiquid" securities. (By "illiquid" we mean securities that can't be sold within a reasonable period of time - usually seven days - at the approximate price used by the fund in determining NAV.)

Most mutual funds are open-end funds but closed-end funds are subject to similar SEC registration and regulation requirements, and are subject to numerous requirements imposed for the protection of investors. Closed-end funds are regulated under the Investment Company Act of 1940 and are also subject to the Securities Act of 1933 and the Securities Exchange Act of 1934.

Although less popular than their open-ended counterparts, these investment vehicles are worth a second look. For more on these types of funds, review the following article: Open Your Eyes To Closed-End Funds.

Open-End Fund
In simple terms, an open-end mutual fund is when a company aggregates money from many investors and invests the money in stocks, bonds, short-term money-market instruments or other securities. Investors purchase mutual fund shares directly from the fund itself at a price that is determined by the fund's per-share net asset value (NAV) plus any shareholder fees that the fund imposes at purchase (such as sales loads). Mutual fund shares are "redeemable": when the holder of the mutual fund shares wants to sell those shares, he or she sells them back to the fund (or to a broker acting for the fund) at their approximate NAV minus any fees the fund imposes at that time (such as deferred sales loads or redemption fees). Open-end fund shares cannot be bought or sold in secondary markets, such as the New York Stock Exchange or the Nasdaq.

In most cases, mutual funds sell their shares continually to investors. However, there are circumstances where the investment adviser may close the fund to new investors - usually when it's decided that the fund has become too large to manage effectively. Like closed-end funds, the investment portfolios of open-end mutual funds vary broadly across many investment styles, return objectives, investment strategies and risk tolerance.

The fees charged by mutual funds can significantly impact total return and should be carefully assessed by investors. All funds charge investors some level of management fees for operating the fund. Some also pass on their distribution and service costs, commonly referred to as "12b-1" fees. In addition, "load" funds impose a sales charge when the shares are purchased (front load) or sold (back load). To cater to a wide variety of investors, funds may create a number of different "classes" of shares, with each class having different fees and expenses. Finally, some funds calculate sales charges based on the investment amount with larger investments incurring smaller fees (or eliminating the fee altogether). These investment threshold levels, known as breakpoints, are important features for investors.

Net Asset Value


Related Articles
  1. Mutual Funds & ETFs

    Open Your Eyes To Closed-End Funds

    Although less popular than their open-ended counterparts, these investment vehicles are worth a second look.
  2. Investing Basics

    What's a Closed-End Fund?

    A closed-end fund is a mutual fund that has an initial offering (IPO) of shares, and once those shares are sold, no additional shares are issued. Since it is a public offering, closed-end funds ...
  3. Mutual Funds & ETFs

    An Introduction To Closed-End Mutual Funds

    If you're looking to generate income for your investments, look no further.
  4. Investing Basics

    Closed-End Vs Open-End Funds

    Much like an individual’s wardrobe, many portfolios are collections of separate items. They combine stocks and bonds and other investments into one product.
  5. Financial Advisors

    Why You Should Consider These Closed-End Funds

    Advisors looking to recommend closed-end funds to clients might want to consider ones that have withstood the test of time. Here are a few examples.
  6. Mutual Funds & ETFs

    Trading Mutual Funds For Beginners

    Learn about the basics of trading and investing in mutual funds. Understand how the fees charged by mutual funds can impact the performance of an investment.
  7. Investing Basics

    Understanding Open-End Funds

    An open-end fund is a type of mutual fund that does not limit the amount of shares it issues, but issues as many shares as investors are willing to buy.
  8. Mutual Funds & ETFs

    A Guide to Mutual Funds Trading Rules

    Make sure to review this guide on the dos and don'ts of mutual fund trading before you invest, including how trades are executed and which fees to look out for.
  9. Investing

    Advising FAs: Explaining Mutual Funds to a Client

    More than 80 million people, or half of the households in America, invest in mutual funds. No matter what type of investor you are, there is bound to be a mutual fund that fits your style.
  10. Mutual Funds & ETFs

    Looking to Buy Mutual Funds Online? Here Is How

    Learn how to buy mutual funds online; discover which websites offer mutual fund trading services, how to choose a fund and typical fees.
RELATED TERMS
  1. Closed-End Fund

    A closed-end fund is a publicly traded investment company that ...
  2. Fund Company

    A commonly used term to describe an investment company, which ...
  3. Closed-End Management Company

    An investment-management company that sells a limited number ...
  4. Foreign Fund

    A mutual fund, closed-end fund or exchange-traded fund that invests ...
  5. Investment Company

    A corporation or trust engaged in the business of investing the ...
  6. Interval Fund (Scheme)

    A fund that combines the features of open-ended and closed-ended ...
RELATED FAQS
  1. How do I purchase shares of a closed-end investment?

    Understand the difference between open-end and closed-end funds, and learn how an investor can purchase shares in a closed-end ... Read Answer >>
  2. What are the primary differences between a closed end investment and an open end ...

    Learn what the primary differences are between open-end investments and closed-end investments, and the implications for ... Read Answer >>
  3. What risks are associated with a closed end investment?

    Explore the characteristics of closed-end funds as compared to open-end funds, and understand the risks associated with investing ... Read Answer >>
  4. Why is it that when investors realize returns on a mutual fund, its price tends to ...

    Mutual funds have been in existence since 1924, when the first open-ended mutual fund was created. Since then, the market ... Read Answer >>
  5. Can an open-ended fund's price appreciate significantly?

    Theoretically, open-end mutual fund prices can experience a significant increase in price. However, three factors need to ... Read Answer >>
  6. Why do some closed-end mutual funds trade above or below their net asset values?

    Intuition tells us that a mutual fund's net asset value (NAV) (the net value of all assets within the mutual fund's portfolio ... Read Answer >>
Hot Definitions
  1. Over-The-Counter - OTC

    Over-The-Counter (or OTC) is a security traded in some context other than on a formal exchange such as the NYSE, TSX, AMEX, ...
  2. Quarter - Q1, Q2, Q3, Q4

    A three-month period on a financial calendar that acts as a basis for the reporting of earnings and the paying of dividends.
  3. Weighted Average Cost Of Capital - WACC

    Weighted average cost of capital (WACC) is a calculation of a firm's cost of capital in which each category of capital is ...
  4. Basis Point (BPS)

    A unit that is equal to 1/100th of 1%, and is used to denote the change in a financial instrument. The basis point is commonly ...
  5. Sharing Economy

    An economic model in which individuals are able to borrow or rent assets owned by someone else.
  6. Unlevered Beta

    A type of metric that compares the risk of an unlevered company to the risk of the market. The unlevered beta is the beta ...
Trading Center